Crunch time on a couple of trades

The trouble with playing index futures option spreads is the same trouble that had me stop trading spreads on SPY a few months back, lack of volatility.

Initially, lack of volatility looks like a good thing when you just don't want the security or index that the spread is on to move against the spread... or to stay within the entire trade for an iron condor. Low volatility sounds like the levels are just not changing quickly so the moves, when they come, will generally be slow.

While that seems to be true on the surface, volatility is priced into the premiums of the options contracts. Higher volatility equals higher premiums... they just plain cost more. The reverse is also true, low V = lower premiums which leads to having to take either wider spreads or spread that are closer to the level at the time.

This is where things can get hairy.

To keep the absolute risk the same all the time, for instance 20 points on the S&P500 futures between short and long calls, means moving that much closer to the levels at the time. I placed two call spread trades last month with short durations. These were at the 1160/1180 and 1165/1185 levels. In order to make my profits the S&P500 would have to stay under these levels. For the sake of one day entering the trades I could have (and did try...but that is another story) to set 1170/1190.

One day made the difference between being profitable and taking a decent loss...had I closed my trades today. I decided to hold as the price of the trade to close is inflated due to the proximity of the S&P levels to the spread trades. So buying back my short 1160 call while the S&P is at 1165 would cost me $1250 in intrinsic value (5 points X $250) plus at least half that again in extrinsic value. That is close to a $2000 loss.

Waiting one more day drops the extrinsic value by a certain amount...waiting until Friday drops it to zero. So my dilemma is now to decide if I out wait the market and hope for a move lower and/or let the trades expire ITM and take only the real intrinsic value hit by not buying back the options. Last month my trades lost a bit as I closed them taking the extra hit...as it turned out I should have (famous last words, I know) held them to see 100% of my profit as the market did turn for me...too late though.

The trouble is for every point into my trade the S&P goes the tally against me goes up $250...per trade.

I still really like the iron condor trades, I just need to rethink my short term entries...at the very least when the market is low in volatility. Had I been doing these trades all on my own I would have sacrificed some gains to move the trade farther as I knew that these ones ended up inside the trend channel on the upside... but the odds were in my favour even then. The thing about odds is the math really doesn't matter... what happens is what matters. I have that argument the odd time with mathees though.

I did have some faith in the S&P not breaking the 1150s before Friday... but that was last week and 1150 is already past.

Jeff.